I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Wednesday, October 22, 2008

A Note For Readers

This blog was started in December 2006 as a way to more widely share my views (and warnings) about the disastrous course we had embarked on, i.e. allowing a debt explosion to shape and undermine the national and global economy.

There is a large amount of data and charts that were posted early on. I pretty much hate repetition, so I view those postings as "required reading" for anyone who wishes to get a basic understanding of where this "Crisis" came from. (I also hate patting myself on the back,but I do have to say it: "I told you so". That and $5 will get you a grande latte). The first purpose of this post, therefore, is to urge readers to go back to the very early postings.

The second one is to explain my current stance: Ladies and gentlemen, the situation is unfolding almost entirely as I expected and laid out in hundreds of postings in the past. Thus, now is the time for yours truly to engage in patient observation from the safety of a previously arranged "safe place" (financially speaking). When the proverbial doo-doo is furiously hitting the fan it's not smart to predict where it will land, but to take cover and wait.

Essentially, there isn't much to say that I haven't already said before, including what we should be doing to ameliorate this self-inflicted disaster, instead of the Knee Jerks' actions so far.

I do hope that the next US administration will see the light and change course. We will know as soon as the next Treasury Secretary is nominated. If he/she is one of the usual Our Gang(sters) from Wall Street/Park Ave. then we will be in for more trouble (e.g. Larry Summers, who is all over TV these days trying to sound oh so eminently grise). I do so hope that Mr. Obama realizes that CHANGE requires... change.

Anyway, please do go back to the early postings if you have the inclination and time...

21 comments:

Sen. Obama has been consulting with Paul Volcker of late (cf. http://gata.org/node/6800) ... although one doubts Volcker's willingness to take on a role in Treasury, would you consider him part of "Our Gang"? Any suggestions on who might be best (or where the President-elect should look) for help outside of folks who are old hands or alumni of famous investment-cum-commercial banks?

Many thanks for your time and efforts. I did read all your earlier blogs when I first found your site - took me several hours. Well worth the effort. I still do not fully understand the 'derivatives' business but I keep looking for suitable sources. Getting there slowly!

I also wish to thank you for some of the texts you suggested, most particularly, Bookstaber.

Thanks for the advice- I don't know why I didn't think of it before. It is answering a lot of questions.

I find this posting from Dec 06 particularly insightful:

Devoted "inflationists" claim that the US will have no choice but to devalue the dollar and inflate its way out of the onerous debt. In my opinion that is nearly impossible because of the following reasons:The only kind of debt that can be "destroyed" this way is fixed-rate, long-term bonds or 30 year mortgages. There is much less of such debt now than, say, 1980 and what there is, is constantly securitized and swapped to and fro into short and variable through the enormous derivatives market.Monetary inflation immediately results in very high interest rates, making debt payments extremely expensive and rendering debt roll-over almost impossible. Defaults would rise dramatically and a massive recession would ensue.The only way to "inflate" in this fashion is by printing money, relegating the dollar to the same league as the Weimar Republic mark, the Argentinian peso of the 1980's, etc. It is ludicrous to imagine that any sane administration would choose to do that by choice and throw away the global reserve status of the US dollar.American assets would become dirt cheap for foreigners with strong currencies who would proceed to strip the country bare - like wealthy Americans did to Europe after WW I.How would the US economy function under such a scenario? By monetizing gold and silver? Keep in mind there is a finite amount of such metals in the world - that by itself creates ideal deflationary conditions. Barter? Please...

Where can we find out what % of debt long term debt actually represents?

The best blog around, I check it every day. I also enjoy http://www.dailyreckoning.com/ between the two of them they opened my mind to what was really occuring under the surface. There simply are so many voices that have a stake in keeping the proverbial status quo in place and the establishment in power. Sites like these are so refreshing and illuminating.

@ Thai"The only way to "inflate" in this fashion is by printing money, relegating the dollar to the same league as the Weimar Republic mark, the Argentinian peso of the 1980's, etc. It is ludicrous to imagine that any sane administration would choose to do that by choice and throw away the global reserve status of the US dollar."

The day might not be too far off when the US government is forced to decide to print money Weimar style or simply default on their debt.

"There is much less of such debt now than, say, 1980 "This is entirely untrue as far as government debt is concerned. Me thinks government bailouts with borrowed money in the trillions. Then when it's time to pay up either outright default or money printing. Where do you think government will get the money to keep servicing its own debt? Gullible foreigners? Santa? The unemployed and huddled masses? http://zfacts.com/p/318.htmlIn the end it is largely a policy decision if government defaults or prints up money. Knowing how our politicians operate I think they will decide to print money. Not just yet, but in a few years from now.

"The day might not be too far off when the US government is forced to decide to print money Weimar style or simply default on their debt.

Printing money will happen AFTER a default, since once default occurs there will be no borrowers for sovereign debt. And the default will occur because potential borrowers will realize that the government either can not repay, or can not repay in anything but radically debased currency. Another way a default will likely occur is that nations that heretofore have recycled dollar profits into bonds will, for a variety of reasons, stop doing so. China, when we stop buying their goods, and Saudi Arabia as oil falls below a certain price.

A country can devalue its old debts w/hi inflation and still borrow at low rates in foreign currencies (assuming it has an export industry to service the new debt) but not if it has already defaulted so if it is going to be forced to resort to printing it will do so before defaulting, not after.

"The U.S. enjoyed a pretty robust economy that enabled the sport to grow, but that has changed significantly in the last six months," said Terry Dolan, manager of Chevy Racing. "And it's probably going to drastically affect what the sport may look like 12 months from now."

Thanks H.I've been a devoted (lurking) reader since the beginning, ever since JJ on CFN said that Dumas has started his own place.BTW, do you know where JJ hangs out? I miss his wisdom. I used to scan CFN to read anything you or he wrote, it's comforting to have a lighthouse in this storm. I now feel prepared to be a lighthouse to others, thanks in no small part to you. Keep up the good work. Back to the bunker now...

Hellacious:Much has happened that I anticipated, some has not. What has surprised me: the dollar bull market! As I see it dollars are a commodity which Zimbabwe Ben can create at will and has. If you look at the monetary base, which I follow, you would expect a hyperinflation, or at the very least South American inflation rates of 20-35%. Commmodities fall, the dollar rises. Crazy. Bonds rise, stocks fall. Crazy. Eventually this will reverse as the true bear market occurs, long-term bonds. At least that's how I see it.Keep up the good work.

Hellacious:Much has happened that I anticipated, some has not. What has surprised me: the dollar bull market! As I see it dollars are a commodity which Zimbabwe Ben can create at will and has. If you look at the monetary base, which I follow, you would expect a hyperinflation, or at the very least South American inflation rates of 20-35%. Commmodities fall, the dollar rises. Crazy. Bonds rise, stocks fall. Crazy. Eventually this will reverse as the true bear market occurs, long-term bonds. At least that's how I see it.Keep up the good work.

I started reading Sudden Debt by pure chance not long after you started this blog, (did a search looking for an explanation of what CDO and CDS were and ended up on a great explanation by Hell for the layman). After reading Hell it confirmed for me that something was very very wrong with the financial system and that things were going to go very very pear shaped in the not too distant future.

I wish to thank you Hellasious for opening my eyes and ears to this finanical mess and for giving me enough knowledge to tell others as to why they needed to protect themselves. It's a great service you have provided.

Considering that the Black Caucus defended Franklin Raines and advocated legislation that caused the subprime meltdown, why do you think that Obama would pass legislation that would solve the problem? Unfortuntely, in the past, Obama has just gone with the flow or even fought to force banks to issue loans to high risk borrowers. But he really is probably the best person now who would be able to fix the mess. It took a Nixon to reach out to Mao, it took a Reagan to make peace with the Soviet Union, and perhaps it will take an Obama to solve this addiction to debt and social welfare.http://www.youtube.com/watch?v=cMnSp4qEXNM&feature=related

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.